Short Selling Cryptocurrencies – The Devil’s Advocate

Most likely, Jamie Dimon (CEO of J.P. Morgan) did not talk innocently of a dollar-backed cryptocurrency while calling Bitcoin “a fraud”. Any currency that could fix the price level volatility (FED coin?) while taking advantage of the technology benefits could be an immediate winner for mass adoption – mass belief.

Volatility…

Potential proponents feel alienated by the price volatility of non-fiat based digital currencies; they want a faster, open, cheap – and stable – way to transact. So, the essential question is whether stability can be achieved without centralism.

Deflation? Let’s think of it… An alchemist would have created a magic box limited to spawning 10 gold coins. However, the whole world would have inherited a philosopher’s stone that could create magic boxes at will. The gold analogy with Bitcoin is just wrong. We are not going to dig a hole in Papua New Guinea when a simple GitHub fork could potentially spawn an infinite number of gold nuggets – and it does already.

Back to our topic, volatility makes many cryptocurrency owners feel like riding an over-sensitive bull – despite the overall appreciation, they are facing the second nasty drawdown this year. Antagonistic government policies are certainly contributing to higher volatility. And since altcoins are like small cap, liquidating few large positions may be enough to move the markets.

However, cryptocurrencies may benefit from increased trading on the world’s largest, over-the-counter and decentralized financial market: the Foreign Exchange (FX).

Short-Selling and Hedging

The theory is that short selling helps reduce stock price volatility because speculators are lowering the peak price and inversely raising it when covering their short position. The short selling strategy can also be used to implement hedging regardless of the relative volume.

Many Forex brokers now offer cryptocurrency trading. They love volatile markets because the more trades you do, the more money they make. I would however recommend using regulated forex brokers – cryptocurrencies have much volatility and everything is new for everyone, some brokers may take advantage at your expense.

If you engage in trading cryptocurrencies on the FX market, pay particular attention to the contract specifications, lot size, leverage and commission (on the MT4 screen above you can see the commission is $9 per lot so imagine if you trade LTC/USD). Short selling and trading on margin account involve risks so do your homework or you may end up like this.

Finally, as John Milton (Al Pacino) said in the Devil’s Advocate: “The worst vice is advice”. So don’t take my words for granted.

Frederic Rezeau

I am Frederic, developer with 10+ years of experience working for financial firms in Paris and London specializing in development of real-time trading and brokerage systems.

I am co-founder of Israeli-based video game company Massive Games and founder of award-winning UK-based studio Okijin Ltd.

2014 Honorable Mention Prize Winner – The Linux Foundation and Samsung – Tizen App Challenge.

I created blockonomy.org to throw my two satoshi at a fascinating realm which boundaries spread much beyond technology.

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